Why Gas-Guzzling Airlines Will Crash and Burn

Let's face it; the only "going green" that airlines care about is keeping quarterly reports out of the red. However, environmentalists and investors can find common ground when it comes to airlines' increasing focus on cutting fuel costs. Oil prices have plagued the airline industry for as long as it's existed, devastating well-run companies that couldn't manage to quit their gas-guzzling habit. Read below to discover exactly what you need to know to ensure that your plane portfolio is properly protected from petrol.

A piece of the petroleum pie
Flipping through the pages of an airline's 10-K, the first number that any self-respecting company reports is its fuel expenditures as a percentage of total expenses. While this statistic obviously depends on more than just an airline's fuel use, it's an excellent indication of how much money is being poured straight into the fuselage and out the jet engines.

Source: Author, data from company 10-K reports & www.ioga.com.

It doesn't take an oil analyst to see that crude oil prices correlate almost perfectly with fuel expenditures. What is of interest, though, is a company's ability to shoulder shifting prices and continue with operating expenses as usual. This ability usually depends on (a) how well a company hedges oil prices and (b) how much control it has over price negotiations with oil suppliers. For a relatively small company like JetBlue Airways (Nasdaq: JBLU  ) , we can see how it gets bounced around amid price volatility. For companies that remain slightly more steadfast, Southwest Airlines (NYSE: LUV  ) has reported great successes in hedging and Delta Air Lines (NYSE: DAL  ) remains consistent due to both its size and hedging.

Better than a Prius?
A little-used statistic that deserves a lot more clout in the airline sector is miles per gallon per available seat mile. We analyze MPG every time we buy a car, but this basic measurement of fuel efficiency has escaped airline industry analysts for far too long. By dividing available seat miles (industry lingo for total miles every plane travels times its passenger capacity) by total fuel gallons consumed, we're left with a very useful metric.

Source: Author, data from company 10-K reports.

Introducing JetBlue, the "Prius of the skies." With an average 71.4 MPG per available seat mile over the past four years, JetBlue has consistently blown away its competition, showing that fuel expenditures as a percentage of total operating expenses is only one part of a more intricate story. United Continental Holdings (NYSE: UAL  ) and Delta do necessarily use less fuel efficient planes for their longer international flights, but United's significant advances in the past year provide evidence that change is possible. Delta, on the other hand, continues to flap along at an underwhelming 60.5 MPG per available seat mile.

Aging airplanes
In assessing an airline's addiction to fuel, there's one more variable to add to the equation that, although not directly linked to fuel usage, is quite possibly the most important indicator of future fuel efficiency: fleet age.

Airline companies publish their average fleet age every year, allowing investors to consider repair costs, future airplane orders, and (you guessed it) fuel use. Here's the line-up for current fleet age:

  • Delta: 15.6 years
  • United: 12.4 years
  • Southwest: 10.9 years
  • JetBlue: 6.1 years

Not surprisingly, the age of each airline's fleet correlates directly to its fuel efficiency. Thanks to manufacturers like Boeing (NYSE: BA  ) and Airbus, airplanes are continuing to consume less fuel to fly us from point A to point B. Boeing claims its new 737 MAX beats current comparable airplanes' fuel use by a whopping 13%, translating to an average of nearly two million pounds of saved fuel per plane per year. Here's a quick look at what each airline is doing to update its fleet:

Source: Author, data from Boeing, Airbus, and www.planespotters.net.

As if Delta's lackluster historical fuel efficiency wasn't bad enough, orders for new planes account for only 15% of its fleet, less than half of what United and Southwest are planning on purchasing. JetBlue, the little jet engine that could, will take on new orders amounting to 122% of its current fleet over the next few years. Looks like the new kid on the block will get a little newer.

Petrolophobia, a rational fear
Many people suffer from pteromerhanophobia, a fear of flying. What I can't understand is why airlines such as Delta don't seem to suffer from what I call "petrolophobia," a fear of high oil prices. Whether you call yourself an environmentalist, an investor, or both, I think most would agree with these facts:

  1. Oil is a non-renewable resource.
  2. Oil prices will continue to trend upwards long term.
  3. Commodity dependence is a recipe for disaster.

JetBlue and Southwest continue to respond rationally to petrolophobia, with United quickly catching on to the lucrative opportunities awaiting fuel efficient airlines. Delta, the gas guzzler of the skies, could be heading into turbulence and needs to adjust quickly to remain competitive.

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Fool contributor Justin Loiseau loves window seats and owns none of these stocks. You can follow him on Twitter @TMFJLo and on Motley Fool CAPS @TMFJLo.

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Read/Post Comments (11) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2012, at 5:27 PM, nin4086 wrote:

    I have flown all these airlines(except JetBlue) and no wonder my experience has been in line with the graphs above: southwest was best, united was ok, delta was pathetic.

    Perhaps, there is a common cause for my experience and the airlines' fuel efficiencies: executive management. Bad management for Delta and really good for Southwest.

    BTW, where is Virgin Atlantic and Spirit on these charts?

  • Report this Comment On July 12, 2012, at 5:58 PM, jtmonrow wrote:

    Take a look at Alaska Air [ALK] and Hawaii Holdings [HA] for a couple of well-run companies and cheap stocks with great upside potential.

  • Report this Comment On July 12, 2012, at 6:06 PM, malcolmcochran wrote:

    Fair article. I've been aware of how efficient planes are for a number of years. The main thing that burns fuel is air resistance and planes fly where the air is thin.

    And they keep getting better.

    Of course, it's better, the longer the flight.

    But additionally, an airport, big tho' it is, is small compared to a motorway or a train line.

  • Report this Comment On July 12, 2012, at 7:40 PM, SkepticalBen wrote:

    You feel the age of the plane in your comfort. Delta's old fleet your behind starts hurting in hour one. Convenience and flight times mean less when your seat is older than a junior high school kid.

  • Report this Comment On July 13, 2012, at 12:16 AM, rayjayjj wrote:

    No mention here of Delta's recent purchase of their own refinery? Expect this is an effort to hedge their fuel costs? I also recently read that Delta's refinery has been shut down for needed repairs prior to delivery of the first gallon of Jet A. I would imagine long term this will help their fuel costs. Running a refinery is much different than an airline, hope Delta's board realizes this ahead of time.

  • Report this Comment On July 13, 2012, at 5:33 PM, PeakOilBill wrote:

    In 20 years, there won't be an airline industry, at least not anywhere near the scale of the one today. A barrel of oil will cost $500, maybe $2,000 if you can even get any of the rationed supply. China is projected to be producing 30,000,000 new vehicles a year by 2017. They won't be battery powered. And that is just China!

    We are in the final decade of the petroleum age. Have fun while it lasts. The next decade won't be nearly as much fun as the oil price starts to explode. As far as tar sand oil, or heavy oil, or shale oil, they will only prevent complete collapse of industrial civilization, which is completely dependent on oil, for another couple of decades. But before 2040, those of you still around will be in for a very nasty surprise. Look around, oil runs EVERYTHING! And there is NO scalable, affordable substitute for it. Barring some highly unlikely technological breakthrough in nuclear fusion, there won't be any. If China hadn't developed, we would have been sitting pretty for another 20 to 30 years, but 1.3 billion Chinese will soon be using an immense amount of oil. There is just not enough easy to get, cheap oil left to meet that additional demand.

    And once the few countries that will be exporting oil in ten years realized that they can zoom up the price by holding oil off the market, that is exactly what they will do. Wouldn't you, if you had an energy monopoly? Once everyone is pumping as much as they can, the whole oil market dynamic changes. Even talk of a production cut by anyone will instantly boost the price. It will be a different world. Elon Musk (PayPal, SpaceX) didn't risk millions of dollars of his own money on the electric car for nothing. Geniuses can often see what is coming. Oil is finite. And half the easy supply is already gone.

  • Report this Comment On July 20, 2012, at 11:37 AM, SkepikI wrote:

    An excellent article. But missed the "big one". The most interesting and fuel efficient airplane today is the 787. Orders are climbing and the flight experience at ANA is improving. The game changer airplane. I have many miles in the air internationally and domestic over the past 25 years. The "best" airline has gone back and forth, currently UA and Delta are both on my worst list, but they have been on my best list at one time. The one constant has been Alaska. Singapore was impressive but they don't often go where I travel. Airline managements go up and down, BA is the one beneficiary of this fuel and age pressure. Up from 60 or so, I am looking for more like 80 as time goes on. Yes I am long BA, holding, and know some BA employees. I do not work for BA.

    As for running out of oil, I heard that one in 74... my degree is ChE and there are lots of substitutes, but run out this decade? piffle. My Petroleum Engineer cousin is busy refurbishing 40 year old wells, and wondering why so much promising territory is "off limits" There's lots more out there if we allow the finding and production. Why do you think Canada wanted to build the Keystone pipeline with their own money? Better question- why in the second worst downturn in my lifetime, did the people in power not allow them? This is as close as I care to get to political discussion...about as sharp as a marble.

  • Report this Comment On July 20, 2012, at 12:10 PM, rwruger01 wrote:

    The argument should not be over if/when we will run low on petroleum. The concern ought to be, "Can we afford to pump more gunk into the environment?"

    Pollution from burning fuel in China does not remain in China, nor does our pollution all stay in the U.S. With global warming picking up momentum, we may be beyond improving our environmental stance. Regardless, there are long-term and hidden costs for each gallon of fuel we burn. Looking narrowly at the pump price of a gallon of oil ignores those opaque costs.

    Sadly, those who try to conserve fuel and live environmentally friendly lives pay as much for hidden costs as do profligate users of fuel. Fuel hogs thus socialize their total costs. But, we hate socialism.

  • Report this Comment On July 20, 2012, at 12:41 PM, malcolmcochran wrote:

    I really don't think oil will be the problem, long term.

    It will be electricity. Imagine a big plane, eg the Airbus 380, with a huge spherical fuel tank between the wings. Put the baggage in the wings. Put passengers behind or in front of the tank. Sounds scary? well, just now you sit on top of a tank of hydrocarbon if you are near the planes middle.

    And what's in the tank? Hydrogen. Light but a bit down on energy.

    I have some shares in ITM-Power (ITM.L) which is tiny but if you read its activity, it really is positioning itself. The little locality in the UK, Isle of Wight is moving over to an H2 power source as an experiment. Toyota, Scottish Electricity, and others are involved, but it's all linked with H2 delivered by ITM.

  • Report this Comment On July 22, 2012, at 8:23 AM, NOTvuffett wrote:

    Skepikl, I also find the 'omg we are running out of oil' arguments to be ludicrous. Any of the products from oil could be made from coal or nat. gas. The question is whether or not the govt. will allow it.

    It also makes me crazy when the eco-weenies go on about pollution. Maybe they took a vacation in Europe and rode around on a scooter to save the planet and they don't know that a scooter puts out more pollution than is allowed for new cars in the USA.

  • Report this Comment On July 30, 2012, at 12:19 PM, thidmark wrote:

    "With global warming picking up momentum, we may be beyond improving our environmental stance."

    The planet's condition is fine. It's the human condition that is disgusting.

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